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The sustainable finance package includes the following measures:

• EU Taxonomy Climate Delegated Act: amendments include (i) new criteria for economic activities that make a substantial contribution to one or more non-climate environmental objectives, namely, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems; and (ii) changes expanding on economic activities that contribute to climate change mitigation and adaptation “not included so far – in particular in the manufacturing and transport sectors.” The EU Taxonomy Climate Delegated Act has been operative since January 2022 and includes 107 economic activities that are responsible for 64% of greenhouse gas emissions in the EU. In addition, “new economic sectors and activities will be added, and existing ones refined and updated, where needed in line with regulatory and technological developments.” “For large non-financial undertakings, disclosure of the degree of taxonomy alignment regarding climate objectives began in 2023. Disclosures will be phased-in over the coming years for other actors and environmental objectives.”
• Proposed Regulation of ESG Rating Providers: the Commission adopted a proposed regulation, which was based on 2021 recommendations from the International Organization of Securities Commissioners, aimed at promoting operational integrity and increased transparency in the ESG ratings market through organizational principles and clear rules addressing conflicts of interest. Ratings providers would be authorized and supervised by the European Securities and Markets Authority. The regulation “provides requirements on disclosures around” ratings methodologies and objectives, and “introduces principle-based organizational requirements on” ratings providers activities. The Commission is also seeking advice from ESMA on the presentation of credit ratings, with the aim being to address shortcomings related to “how ESG factors are incorporated into methodologies and disclosures of how ESG factors impact credit ratings.”
• Enhancing Usability: the Commission set out an overview of the measures and tools aimed at enhancing the usability of relevant rules and providing implementation guidance to stakeholders. The Commission Staff Working Document “Enhancing the usability of the EU Taxonomy and the overall EU sustainable finance framework” summarizes the Commission’s most recent initiatives and measures. The Commission also published a new FAQ document that provides guidance on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and on the interactions between the concepts of “taxonomy-aligned investment” and “sustainable investment” under the SFDR.

Taking the Temperature: As previously discussed, the Commission is increasingly taking steps to achieve the goal of reducing net greenhouse gas emissions by at least 55% by 2030, known as Fit for 55. Recent initiatives include the adoption of a carbon sinks goal, the launch of the greenwashing-focused Green Claims Directive, and now, the sustainable finance package.

Another objective of these regulatory initiatives is to provide increased transparency for investors as they assess sustainability and transition-related claims made by issuers. In this regard, the legislative proposal relating to the regulation of ESG rating agencies is significant. As noted in our longer survey, there is little consistency among ESG ratings providers and few established industry norms relating to disclosure, measurement methodologies, transparency and quality of underlying data. That has led to a number of jurisdictions proposing regulation, including (in addition to the EU) the UK, as well as to government inquiries to ratings providers in the U.S.

© Copyright 2023 Cadwalader, Wickersham & Taft LLP

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• • In addition to global initiatives by the United Nations, G7, and the U.S., the need for protection against biodiversity loss has become a central focus of the business and investment communities
  • Biodiversity protection is emerging worldwide as a unifying concept that can mitigate the political polarization surrounding ESG and promote constructive dialogue about sustainability
  • A number of steps can be taken to capitalize on the unique attributes and appeal of biodiversity and leverage its potential to serve as a unifying concept

International Biodiversity Day, May 22, 2023, with its theme “From Agreement to Action: Build Back Biodiversity” was a powerful reminder that momentum for biodiversity conservation is accelerating globally. Biodiversity is increasingly being recognized as a potential unifying concept that can help alleviate some of the extreme political divergence over the term ESG.

ESG, which encompasses a broad range of environmental, social, and governance factors, has become politically charged and the subject of intense debate and varying interpretations. Biodiversity, on the other hand, is widely recognized as a critical aspect of environmental sustainability and it is increasingly acknowledged as a pressing issue by virtually all stakeholders, including scientists, policymakers, businesses, and communities.

Biodiversity represents the variety of life on Earth, including ecosystems, species, and genetic diversity. It is a tangible and universally valued concept that resonates with people from various backgrounds and ideologies. The preservation, protection and conservation of biodiversity are essential for the health and resilience of ecosystems, as well as for addressing climate change and ensuring the well-being of future generations.

By emphasizing biodiversity within sustainability discussions, stakeholders can find common ground and rally around a shared objective: protecting and restoring the Earth’s natural diversity. Biodiversity provides a unifying language and focus that transcends political divisions, as it highlights the interconnectedness of all life forms. It allows for a more tangible and universally valued point of reference, which can facilitate collaboration and drive collective action towards conservation efforts.

In addition to global initiatives by the United Nations, the Group of Seven (G7), and the U.S., the need for protection against biodiversity loss has also become a central focus of business and investment communities, and appears to be receiving a more favorable reception in the U.S. than the broader concepts associated with and motives attributed to ESG investing. This increased attention has, in turn, opened up a number of practical opportunities for action to leverage the potential of biodiversity as a unifying concept.

International Support for Biodiversity Protection

The United Nations formed the Convention on Biological Diversity (CBD) to promote nature and human well-being. The first draft was proposed on May 22, 1992, which was then designated as International Biodiversity Day. Since the Rio Earth Summit in 1992, nearly 200 countries have signed onto this treaty, which is a legally binding commitment to conserve biological diversity, to sustainably use its components and to share equitably the benefits arising from the use of genetic resources.

In December 2022, at the 15th UN Biodiversity Conference (COP15), the CBD adopted the Kunming-Montreal Global Biodiversity Framework that calls for protecting 30 percent of the planet’s land, ocean, and inland waters and includes 23 other targets to help restore and protect ecosystems and endangered species worldwide, and ensure that big businesses disclose biodiversity risks and impacts from their operations. The Kunming-Montreal framework also focused on increasing funding for biodiversity by at least $200 billion per year (with at least $30 billion per year to developing countries by 2030).

The U.S. is one of just a few countries worldwide that has not yet formally approved the CBD. While President Clinton signed the CBD in 1993, the Senate did not ratify it. Although the U.S. was on the sidelines at COP15 in late 2022, in parallel with the CBD approval of the Kunming-Montreal framework, the U.S. reiterated its support for an ambitious and transformative Global Diversity Framework, outlined in this State Department press release.

In addition to committing to conserve at least 30 percent of U.S. lands and waters by 2030, other U.S. leadership initiatives to mainstream and conserve nature that were announced or reaffirmed at that time include:

• • Conserving forests and combatting global deforestation
  • Prioritizing nature-based solutions to address climate change, nature loss, and inequity
  • Incorporating nature into national economic statistics and accounts to support decision-making
  • Recognizing and including indigenous knowledge in federal research, policy, and decision-making, including protections for the knowledge holder
  • Knowing nature with a national nature assessment that will build on the wealth of existing data, scientific evidence, and Indigenous Knowledge to create a holistic picture of America’s lands, waters, wildlife, ecosystems and the benefits they provide
  • Strengthening action for nature deprived communities by expanding access to local parks, tree canopy cover, conservation areas, open space and water-based recreation, public gardens, beaches, and waterways
  • Conserving arctic ecosystems through increased research on marine ecosystems, fisheries, and wildlife, including through co-production and co-management with Indigenous Peoples

The U.S. also spearheaded efforts to reverse the decline in biodiversity globally by advancing land and water conservation, combating drivers of nature loss, protecting species, and supporting sustainable use, while also enabling healthy and prosperous communities through sustainable development. The U.S. also affirmed its financial commitment to and support for international development assistance to protect biodiversity. Additionally, the U.S. made major policy and financial commitments to protect oceans and advance marine conservation and a sustainable ocean economy.

Of particular importance, the U.S. reaffirmed its commitment to advancing science-based decision making and its support for the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.

Most recently, the G7 Hiroshima Leaders’ Communique issued at the close of their meeting on May 20 on the cusp of International Biodiversity Day, affirmed that G7 leadership (including the U.S.) welcomed “the adoption of the historic Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse biodiversity loss by 2030, which is fundamental to human well-being, a healthy planet and economic prosperity, and commit to its swift and full implementation and to achievement of each of its goals and targets.”
G7 leadership also reaffirmed their commitment “to substantially increase our national and international funding for nature by 2025,” and “to supporting and advancing a transition to nature positive economies.” Notably, they also pressed companies to do so as well while at the same time voicing support for TNFD’s market framework for corporate nature related disclosures:

“We call on businesses to progressively reduce negative and increase positive impacts on biodiversity. We look forward to the publication of the Taskforce on Nature-related Financial Disclosures’ (TNFD’s) market framework and urge market participants, governments and regulators to support its development.”

Similarly, multilateral development banks (MDBs) were urged by the leaders of G7 to increase their support for biodiversity by leveraging financial resources from all sources and “deploying a full suite of instruments.”

Increasing Focus On Biodiversity By The Financial Sector

The financial sector has taken note of the growing international support for biodiversity conservation and protection. A 2023 study by PwC found that “55% of global GDP—equivalent to about US $58 trillion—is moderately or highly dependent on nature.” In its report The Economic Case for Nature, the World Bank found that a partial collapse of ecosystem services would cost 2.3 percent of global GDP ($2.7 trillion) in 2030. Conversely, the report found that implementing policies beneficial to nature and biodiversity conservation (including achieving the “30×30” goal subsequently approved by the CBD in the Kunming-Montreal framework and by Executive Order in the U.S.) could result in a substantial increase in global real GDP by 2030.

According to a 2020 report by the World Economic Forum, protecting nature and increasing biodiversity could generate business opportunities of $10 trillion a year and create nearly 400 million new jobs by 2030. Given this economic potential, it comes as no surprise that a growing number of investors are focusing on deploying capital for nature-based opportunities, and trying to assess whether and to what extent companies are susceptible to biodiversity related risks.

Toward those ends, the financial sector has been monitoring and supporting the development of TNFD’s market framework for nature related disclosures that was most recently endorsed by G7. That private global effort was launched in 2021 in response to the growing need to factor nature into financial and business decisions. The fourth and final beta version was issued in March 2023:

“The TNFD is a market-led, science-based and government supported initiative to help respond to this imperative. The Taskforce is nearing the end of its two-year framework design and development phase to provide market participants with a risk management and disclosure framework to identify, assess, respond and, where appropriate, disclose their nature-related issues. The TNFD framework, including TCFD-aligned recommended disclosures, will be published in September 2023 ready for market adoption.”

While the TNFD framework is not legally binding, the final version will be coming on line just in time for use as a guide for compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD), which was effective in April 2023. It will require a substantial number of European companies and others operating in the EU, to start making disclosures regarding biodiversity and nature in coming years.

One of the more significant catalysts for investment in the protection of biodiversity and nature was the establishment of the Natural Capital Investment Alliance as part of the United Kingdom’s Sustainable Markets Initiative announced in 2020 and the Terra Carta sustainability charter launched by King Charles a year later. The Alliance is a public/private venture that aims to invest $10 billion in natural capital assets. Speaking at the One Planet Summit on biodiversity where the Alliance was announced in January 2021, King Charles stated “… I have created a Natural Capital Investment Alliance to help us arrive at a common language on Natural Capital Investment so that we can start putting money to work and improve the flow of capital.”

According to research by Environmental Finance, total assets held in thematic biodiversity funds more than tripled in 2022, and it is anticipated that momentum and growth will accelerate in response to COP 15 in December 2023, and approval of the Kunming-Montreal framework.

Positioning Biodiversity As A Unifying Concept

While biodiversity is not replacing ESG, it is gaining more attention within the broader ESG framework. Biodiversity conservation is supported by a vast body of scientific research and has a broad consensus among stakeholders. Many companies are incorporating biodiversity considerations into their sustainability strategies, and setting goals for conservation, habitat restoration, and responsible land use. Investors are also factoring biodiversity into their decision-making processes, looking for companies that demonstrate strong biodiversity conservation efforts.

Given the universal importance of biodiversity, it can serve as a focal point for mutual understanding for stakeholders with varying perspectives. Biodiversity conservation provides a unifying language that encourages collaborative efforts towards shared goals of environmental stewardship and the preservation of natural resources. Protection against biodiversity loss is not an ideological issue. To the contrary, it is fundamental, practical, and existential: the need to preserve the natural systems that support life on Earth. Emphasizing the importance of biodiversity shifts the focus to concrete and tangible actions required globally and locally, such as species preservation, and ecosystem protection, which can garner broader support and participation and help bridge political divides.

While biodiversity protection is by no means a panacea, there are further steps that can be taken to capitalize on its unique attributes and appeal that can improve the potential for biodiversity to serve as a unifying concept that can help reduce the current political polarization in the U.S. over ESG and promote more constructive dialogue around sustainability:

• • Universal concern – Biodiversity loss affects every individual and society, regardless of political affiliation. It is a shared concern that is oblivious to political boundaries, as the preservation of nature’s diversity is vital for the well-being of all life on Earth. By emphasizing biodiversity as a unifying concept, stakeholders can find mutuality and work together towards its conservation.
  • Inclusivity – Biodiversity requires inclusive engagement by diverse stakeholders and technical and scientific support from local communities, indigenous groups, governments, businesses, civil society organizations and the public. Such engagement fosters dialogue, understanding, and collaboration, breaking down political barriers.
  • Tangible and relatable – Biodiversity is a concrete and tangible concept that people can relate to, unlike some of the more complex ESG concepts, like Scope 3 greenhouse gas (GHG) emissions and Net Zero. It encompasses the variety of species, ecosystems, and genetic diversity, which are easily understandable and relatable to everyday experiences. This relatability can bridge political divides and foster broader support for conservation efforts.
  • Interconnectedness – Biodiversity underscores the interconnectedness of ecosystems and species emphasizing that actions in one area can have cascading far-reaching consequences on others, including ecological, social, and economic effects. Recognizing this interconnectedness can encourage stakeholders to collaborate across sectors and ideologies to address biodiversity loss collectively.
  • Co-benefits and shared values – Biodiversity conservation often aligns with other societal values and goals, such as climate change mitigation, sustainable development, and human well-being. By emphasizing the co-benefits that arise from biodiversity conservation, such as ecosystem services and resilience, stakeholders can rally around shared values and work towards a common vision.
  • Economic implications – Biodiversity loss can have significant economic implications for industries like agriculture, tourism, and pharmaceuticals. It can also have impacts on supply chains and market access. Recognizing the economic value of biodiversity and the potential risks associated with its decline can bring together diverse stakeholders, including businesses and investors, who recognize the importance of integrating biodiversity considerations into their strategies and decision-making processes.
  • Science-based approach – Biodiversity conservation relies on scientific knowledge and research. Emphasizing the scientific evidence on the importance of biodiversity helps build consensus and transcends political biases, providing a foundation for constructive discussions.
  • Local and global perspectives – Biodiversity conservation is relevant at both local and global scales. It allows for discussions that incorporate local knowledge, values, and practices, while recognizing the need for global cooperation to address biodiversity loss and protect shared resources.

To leverage biodiversity as a unifying concept, it is crucial to promote open dialogue, knowledge sharing, and collaboration. Stakeholders should engage in inclusive decision-making processes that respect diverse perspectives and prioritize equitable and sustainable outcomes.

Takeaways

Biodiversity is emerging as a potential unifying concept that can help mitigate the political polarization surrounding the term ESG. While ESG has become a politically charged and debated topic, biodiversity is widely recognized as a critical aspect of environmental sustainability and has broad support across different stakeholders.

By focusing on biodiversity, stakeholders can find common ground in recognizing the importance of preserving nature’s diversity and ensuring the long-term sustainability of ecosystems. Biodiversity loss is a global challenge that affects everyone, irrespective of political affiliation, and it is increasingly acknowledged as a pressing issue by scientists, policymakers, businesses, and communities.

It is important to note that while biodiversity can be a unifying concept, there will still be debates and differing opinions on specific approaches and trade-offs involved in biodiversity conservation. Different stakeholders may have differing priorities, perspectives, and proposed means and methods to address biodiversity loss. The complexity of biodiversity issues, such as balancing conservation with economic development or navigating conflicts between different stakeholder interests, requires careful consideration and dialogue.

© 2023 BARNES & THORNBURG LLP

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In late 2022, the Department of Labor finalized a new rule titled “Prudence in Selecting Plan Investments and Exercising Shareholder Rights,” largely reversing Trump-era guidance that had strictly limited the ability of plan fiduciaries to consider “environmental, social, and governance” (ESG) factors in selecting retirement plan investments and generally discouraged the exercise of proxy voting. In short, the new rule allows a fiduciary to consider ESG factors in selecting investment options, provided that the selection serves the financial interests of the plan and its participants over an appropriate time horizon, and encourages fiduciaries to engage in proxy voting.

The final rule moves away from 2020 Trump-era rulemaking by allowing more leeway for fiduciaries to consider ESG factors in selecting investment options. Specifically, the rule states that a “fiduciary’s duty of prudence must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.” The rule makes clear, however, that there is no requirement to affirmatively consider ESG factors, effectively limiting its scope and effect and putting the onus on fiduciaries to determine whether they want to incorporate ESG factors into their assessments of competing investments.

Overview

• Similar to the Trump-era guidance, there is no definition of “ESG” or an “ESG”-style fund. Debate continues over what kinds of funds can be considered ESG investments, especially in light of the fact that some companies in industries traditionally thought to be inconsistent with ESG conscious investing are now trying to attract ESG investors (e.g. industrials, energy).

• Fiduciaries are not required to consider ESG factors in selecting investment options. However, the consideration of such factors is not a presumed violation of a fiduciary’s duty of loyalty or prudence. Unlike the prior rule, which suggested that consideration of ESG factors could only be considered if all other pecuniary factors between competing investments were equal (the “tiebreaker” approach), the new rule allows a fiduciary to consider potential financial benefits of ESG investing in all circumstances.

• Plan fiduciaries may take into account participant preferences in constructing a fund lineup. Therefore, if participants express a desire for ESG investment options, then it may be reasonable for plan fiduciaries to add ESG funds or to consider ESG factors in crafting the fund lineup.

• ESG-centric funds may be used as qualified default investments (QDIAs) within retirement plans, reversing the prior outright prohibition on use of such funds as QDIAs.

• In some situations, fiduciaries may be required to exercise shareholder rights when required to protect participant interests. It is unclear whether the exercise of such rights is only limited to situations that have an economic impact on the plan, or applies to additional situations. The clarification suggests that the exercise of proxy voting is not disfavored as an inefficient use of fiduciaries’ time and resources, as the prior iteration of the rule suggested.

Effective Date and Challenges to the Regulation

The new rule became effective in January 2023, except for delayed applicability of proxy voting provisions. However, twenty five state attorneys general have joined a lawsuit in federal court in Texas that seeks to overturn the regulation. The court is in the Fifth Circuit, which historically has been hostile to past Department of Labor regulations (including Obama-era fiduciary rules overturned in 2018, though the ESG rule is less far-reaching than the fiduciary rule and may survive a challenge even in the Fifth Circuit). Congressional Republicans have also introduced a Congressional Review Act (CRA) review proposal to repeal the regulation that has gained the support of Joe Manchin (D-WV). Although CRA actions are not subject to Senate filibuster rules, they are subject to presidential veto, which President Biden is sure to do if the repeal reaches his desk.

Action Steps

Employers should assume that the ESG rules will remain in effect and engage with plan fiduciaries, advisors, and employees and determine the extent to which ESG considerations should (or should not) enter into fiduciary deliberations when considering plan investment alternatives. Some investment advisors have already begun to include separate ESG scorecards for mutual funds and other investments in their regular plan investment reviews. Fiduciaries should also consider whether and how the approach that is ultimately taken should be reflected in the plan’s investment policy statement. Plans that delegate full control over investments to an independent fiduciary (an ERISA 3(38) advisor) should engage with their advisor to determine whether and the extent to which ESG considerations will be part of that fiduciary’s process, and whether that is consistent with the desires of the plan fiduciaries and participants.

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For those with an eye on ERISA and its fiduciary rules, the past few years have caused whiplash when it comes to environmental, social, and corporate governance (“ESG”) investments in retirement plans.  With a new rule from the Department of Labor imminent, let’s review where we are, how we got here, and what’s next.

ERISA generally requires those making investment decisions for retirement plans to do so solely in the best interests of plan participants, taking into account pecuniary factors like fees, and risks and returns.  Guidance issued during the Obama administration indicated an openness to non-pecuniary factors, such as ESG, as a “tie-breaker”.  The tide turned during the Trump administration, with additional guidance and a final rule eventually issued, which required plan fiduciaries to “select investment and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”

In an unsurprising twist, the Biden administration soon reversed course, blocking the Trump administration’s final rule and issuing its own proposed rule to “remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights.”  A DOL fact sheet seeks to address concerns that the rule fundamentally changes a fiduciary’s duties, by highlighting the fact that the proposed rule “retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on material risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan.”

The final rule is now under review with the White House and is expected to be released soon.  We will provide an update when that occurs.

Meanwhile, four House Republicans recently introduced the Safeguarding Investment Options for Retirement Act, with the stated purpose of protecting “investors from having politically motivated ‘woke’ environmental, social, and governance (ESG) issues put ahead of hardworking Americans’ investment return.”

What is a plan sponsor or committee to do?  Whatever happens in the upcoming midterms, we expect the rules regarding ESG funds in retirement plans to remain a contentious subject, potentially changing with each presidential administration.  It is imperative for plan fiduciaries to work closely with the plan’s financial advisors and legal counsel to ensure that all relevant factors—including the latest guidance on ESG—are being considered when making plan investment decisions.

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“From day one, President Biden and EPA have been committed to delivering progress on environmental justice and civil rights and ensuring that underserved and overburdened communities are at the forefront of our work,” said EPA Administrator Michael S. Regan. “With the launch of a new national program office, we are embedding environmental justice and civil rights into the DNA of EPA and ensuring that people who’ve struggled to have their concerns addressed see action to solve the problems they’ve been facing for generations.”

“Since the beginning of the Biden Administration, its appointees have consistently stressed the idea of environmental justice,” said Jacob Hupart, Member at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. “Specifically, in this context, the invocation of environmental justice has focused on the principle that addressing the various environmental issues confronting society—including the challenge of climate change—must also take into consideration that underserved communities frequently are disproportionately impacted by environmental issues, and so these communities should receive particular attention. That the Biden Administration is establishing an EPA office dedicated specifically to this issue is congruent with their prior rhetoric and action (such as the appointment of Michael Regan as the EPA Administrator), and emphasizes this aspect of their environmental program.

What is the Intent and Significance of the EPA’s New Office?

With more than 200 EPA staff members across ten regions dedicated to the project, the office will put substantial resources into environmental justice efforts across the United States. This includes, but is not limited to, working with state, local, and Tribal partners to understand their EJ needs, disbursing grants and technical assistance, cooperating with other EPA offices to incorporate EJ initiatives in all areas, and ensuring funding recipients are complying with relevant civil rights laws.

This new focus by the EPA is extremely meaningful not only for environmental justice in the US, but for the direction of major regulatory and administrative bodies. “The EPA and the White House have enunciated policy, established guidance, and issued Executive Orders, but these tools do not have enforceable legal requirements,” explained Richard Glaze, environmental litigator and Partner at Barnes & Thornburg LLP. “Combining the existing Office of Environmental Justice with the External Civil Rights Compliance Office to form the Office of Environmental Justice and Civil Rights sends a signal that the EPA is willing to use enforcement tools with teeth to advance the administration’s Environmental Justice goals.”

Stacey Halliday, environmental lawyer and Principal at Beveridge & Diamond PC, noted how this is a substantial shift from the status quo. “In the past two years, we’ve seen momentum in fits and spurts from a variety of executive branch agencies following the January 27 issuance of EO 14008– including notable action from CEQ, DOE, DOJ, DOT and EPA,” she says. “However, this most recent action by EPA is only likely to accelerate this momentum and have impacts that will extend beyond the Biden Administration. We can expect to see more alignment between EPA program offices […] and a ‘from-the-top’ imperative to incorporate EJ in overall agency decision-making. This is a big change from past practice when EJ and civil rights enforcement were separately housed within other program offices and lacked this level of authority and agency-wide reach.”

“The Department of Justice is fully on board with the EPA in this effort,” added Mr. Glaze. “It recognizes that “Environmental justice and Title VI are both rooted in the same basic principle that no person should bear an unfair share of harm on account of their race, color or national origin” and warns that Title VI of the Civil Rights Act is a powerful  for the coordination of Title VI and Environmental Justice.”

What Does the New EPA Office Mean for Companies?

The EPA’s new office comes at a time when companies are turning their focus to the upcoming recession, reminding them that climate and social justice must remain a top priority even as companies prepare for economic instability. This should send a message to corporations who have already been facing mounting pressure to incorporate climate justice considerations into their missions and operations. By creating a political culture of increased environmental and social scrutiny, the Biden administration is slowly changing “ESG” from a greenwashing buzzword to a corporate obligation.

“Companies seeking to gain the benefit of competitive federal funding,” said Ms. Halliday, “especially following the flush of resources coming from the IIJA and IRA – are more frequently asked to provide a detailed accounting of how they will assess and address EJ impacts, as well as how projects may contribute to the Justice 40 Initiative (directing 40% of benefits from federal climate investments to disadvantaged communities).”

“Although the ultimate impact of this new office is uncertain, as the actual initiatives and enforcement actions brought will have to be assessed and evaluated, at minimum, the creation of this office indicates that policy and enforcement actions centered around environmental justice are more likely to appear over the coming months and years,” added Mr. Hupart. “It should also be noted, however, that other environmental actions undertaken by the Biden Administration—such as the mandatory climate disclosures proposed by the SEC, which would be applicable to all public companies—are more likely to be an immediate focus for corporate America rather than potential EPA enforcement actions focused on specific instances implicating environmental justice concerns.”

What Does the New EPA Office Mean for ESG Considerations?

The environmental, social, and governance movement (ESG) has been undeniably energized by the EPA’s new office, particularly at a time when ESG movements are under scrutiny. If Biden’s plan to make environmental justice a more common business priority succeeds, centering sustainability issues will no longer be enough for firms to differentiate themselves to investors. Corporations targeting ethically-minded shareholders will need to develop more detailed, creative ESG approaches.

“Environmental justice combines elements of the “E” and the “S” of ESG and companies that have embraced ESG are well-advised to consider whether their operations implicate environmental justice and, if they do, give these issues the attention they deserve,” said Mr. Glaze. “Combined with the recent SEC climate disclosure rule, these ESG issues that companies have considered ‘optional’ will now have more force behind them [and companies] can no longer ignore them.”

“Even before the creation of this office, the renewed federal and state prioritization of EJ has had an impact on corporate behavior – driven broadly by federal guidance and tools, new state permitting requirements, targeted environmental enforcement, and investor demand,” said Ms. Halliday. “In the last year or so, we have seen an increase in shareholder proposals related to climate disclosures, racial equity audits and environmental justice audits, with investors seeking to understand how company activities impact disadvantaged communities and implications for long-term value for the company.”

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For the second time in less than a month, L’Oreal finds itself embroiled in a PFAS lawsuit related to its mascara products. The L’Oreal PFAS lawsuit was filed in the New York federal court on March 9, 2022. Cosmetics and PFAS is a topic that saw increased scrutiny from the scientific community, legislature, and the media in 2021. As we predicted in early 2021, the increased attention on the industry presented significant risks to the cosmetics industry, and our prediction was that the developments made the cosmetics industry the number two target for future PFAS lawsuits. In less than three months, four industry giants – Shiseido, CoverGirl, L’Oreal and Burt’s Bees – were hit with lawsuits related to their cosmetics and PFAS content in some of the companies’ products.  The industry, insurers, and investment companies interested in the consumer goods vertical with niche interest in cosmetics companies must pay careful attention to the Burt’s Bees lawsuit and the increasing trend of lawsuits targeting the industry.

PFAS and Cosmetics: the 2021 Foundation

On June 15, 2021, a scientific study in the Journal of Environmental Science and Technology Letters published conclusions regarding testing of a variety of cosmetics products from the United States and Canada for PFAS content, and found PFAS present in over half of the products. On the same day that the study was published, the No PFAS In Cosmetics Act 2021 was introduced in the Senate by U.S. Senators Susan Collins (R-ME), Richard Blumenthal (D-CT), Dianne Feinstein (D-CA), Maggie Hassan (D-NH), Jeanne Shaheen (D-NH), Kirsten Gillibrand (D-NY), and Angus King (I-ME). The bill sought to ban PFAS in cosmetics.

These two developments led us to conclude “with these developments, our prediction that cosmetics is the number two target for PFAS litigation issues behind water rings true.”

Why PFAS In Cosmetics Is A Concern

PFAS content in cosmetics raises concerns for human health in scientific communities due to the fact that PFAS are capable of entering the bloodstream in ways other than direct oral ingestion, and one of these ways includes dermal absorption. Concerns have also been raised regarding absorption of PFAS into the bloodstream by way of tear ducts. The absorption issue is one that is being studied fairly extensively through various pending scientific studies. At the end of 2021, the federal Agency for Toxic Substances and Disease Registry (ATSDR) went so far as to recommend that citizens in Southern New Hampshire reduce their risk of further PFAS exposure by avoiding the use of certain consumer goods, including cosmetics.

L’Oreal PFAS Lawsuit

On March 9, 2022, plaintiffs Zada Hicks and Stephanie Vargas filed a lawsuit in the New York federal court seeking a proposed class action lawsuit against LOreal. The L’Oreal PFAS lawsuit alleges that the company does not disclose to consumers that its mascara and other products contain PFAS. Instead, the lawsuit states, the products were fraudulently and misleadingly marketed as safe for consumers and environmentally friendly, in violation of federal and state consumer laws. The Complaint details several examples of L’Oreal marketing indicating the safe and environmentally-friendly nature of the products.

The plaintiff seeks certification of the class action lawsuit, injunctive relief, damages, fees, costs and a jury trial. The proposed class is any consumer in the United States, or in the subclass of New York, who purchased the relevant L’Oreal products.

Just the Beginning For Cosmetics Industry

With studies underway, legislation pending that targets cosmetics, and increasing media reporting on cosmetics concerns to human health, the cosmetics industry has a target on its back with respect to PFAS that will have impacts on the industry’s involvement in litigation. Twelve months ago, we made this prediction: “Personal injury / products liability cases, false advertising, and failure to disclose theories of liability are some of the more prominent allegations that cosmetics companies are likely to face. Further, the cosmetics industry is concerned about federal and state level regulatory enforcement action for environmental pollution remediation costs stemming from placing PFAS waste into the environment as a by-product of the manufacturing process.”

The first part of our prediction is becoming reality, as four significant cosmetics industry players now find themselves embroiled in litigation focused on false advertising, consumer protection violations, and deceptive statements made in marketing and ESG reports. The lawsuits may well serve as a test case for plaintiffs’ bar to determine whether similar lawsuits will be successful in any (or all) of the fifty states in this country. Each cosmetics company faces the stark possibility of needing to defend lawsuits involving plaintiffs in all fifty states for products that contain PFAS.

It should be noted that these lawsuits would only touch on the marketing, advertising, ESG reporting, and consumer protection type of issues. Separate products lawsuits could follow that take direct aim at obtaining damages for personal injury for plaintiffs from cosmetics products. In addition, environmental pollution lawsuits could seek damage for diminution of property value, cleanup costs, and PFAS filtration systems if drinking water cleanup is required.

Conclusion

It is of the utmost importance that businesses along the whole supply chain in the cosmetics industry evaluate their PFAS risk. Public health and environmental groups urge legislators to regulate PFAS at an ever-increasing pace. Similarly, state level EPA enforcement action is increasing at a several-fold rate every year. Now, the first wave of lawsuits take direct aim at the cosmetics industry. Companies that did not manufacture PFAS, but merely utilized PFAS in their manufacturing processes, are therefore becoming targets of costly enforcement actions at rates that continue to multiply year over year. Lawsuits are also filed monthly by citizens or municipalities against companies that are increasingly not PFAS chemical manufacturers.

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